Obamacare In A Nutshell? Health Care Law Compliance Requires Immediate Attention From Employers
With the second term of President Obama well under way, employers need to take seriously the job of preparing for Obamacare, a.k.a. the Patient Protection and Affordable Care Act (the “Act”), particularly in light of the United States Supreme Court’s June 2012 decision upholding the Act. Employers must ensure they are complying with the Act’s requirements that are already in effect and preparing for the requirements that will take effect in the near future.
The Act requires nearly all Americans to obtain health insurance through their employer or a government exchange, using penalties and tax credits as incentives. In this article, we offer a general overview of the requirements of the Act from the employer’s perspective.
The Act’s requirements are still evolving. For example, on January 2, 2013, the Internal Revenue Service (“IRS”) issued new proposed regulations concerning the Act’s implementation. Before the proposed regulations become final, there will be a review and comment period, culminating in a public hearing currently scheduled for April 23, 2013. Employers may rely on these proposed regulations until they are issued (possibly with changes) in final form.
A. Covered Employers
The Act requires covered employers to provide “minimum essential” health care coverage to employees – or pay a penalty for failing to do so. In this regard, the Act also requires individuals, with limited exceptions, to obtain “minimum essential” coverage or pay a penalty, calculated as a percentage of their adjusted gross income (this is the “tax” that the U.S. Supreme Court upheld in June 2012).
The Act applies to employers with 50 or more full-time employees, as defined by the Act. Generally, full-time employees are defined as employees working on average at least 30 hours per week, in any given month. Employers must determine their number of full-time equivalent employees based on the hours worked by all employees (full and part-time) in the prior year. Unfortunately, though, determining how many full-time employees an employer has is not always simple, especially for employers with part-time and seasonal workers.
For example, employers must include the hours worked by part-time employees (i.e., those working fewer than 30 hours per week) in the calculation by dividing their total number of monthly hours worked by 120 hours (thereby converting them into a fraction of a full-time employee).
There is a special rule for seasonal workers as well. If an employer had 50 or more full-time employees for no more than 120 days (or four months) during the prior calendar year, and the employees causing the employer to have 50 or more employees for that period were seasonal workers, the employer is not covered by the Act. Seasonal workers are those who perform labor or services on a seasonal basis. Until further guidance is issued, employers may use a reasonable, good faith definition of seasonal worker based on existing Department of Labor regulations.
Because employers must determine whether the Act applies to them for the first time for 2014, the new proposed regulations provide transitional relief: in determining whether it must provide health care coverage in 2014, an employer may review any consecutive six-month period in 2013. The regulations suggest that an employer may wish to use March through August 2013 to determine its status, leaving September through December 2013 to make any adjustments to its plan (or to establish a plan).
The same coverage rules apply to non-profit and for-profit employers alike, i.e., if a non-profit has 50 or more full-time equivalent employees, the non-profit must provide health insurance to all full-time employees.
B. Requirements Already In Effect
All health insurance plans offered by employers to employees must include the requirements of the Act that are already in place for all plans, including: (i) mandatory coverage of participants’ adult children up to age 26; (ii) ban on lifetime caps on coverage; (iii) ban on exclusions for pre-existing conditions for children under age 19; (iv) restriction on annual limits on coverage; (v) mandatory provision of “medical loss” rebates to enrollees; (vi) mandatory provision of Summary of Benefits and Coverage; and (vii) all other requirements discussed below.
Summary Of Benefits And Coverage (“SBC”): The mandatory SBC is a concise and comprehensible description of health plan benefits. Generally, the SBC must not exceed four double-sided pages of 12 point font. Employers were required to provide SBCs on the first day of the first open enrollment period beginning on or after September 23, 2012, to participants in a group health plan. Where renewal is automatic, the SBC must be provided no later than 30 days prior to the first day of the new plan or policy year. The rule applies to all fully insured and self-insured plans, with limited exceptions such as HIPAA-excepted plans (including stand-alone dental or vision plans). The Departments of Labor, Health and Human Services, and Treasury have issued guidance on preparing an SBC, setting forth extensive requirements concerning content, form, and appearance, and providing model forms. The Act imposes a fine of up to $1,000 per day per enrollee for any entity that willfully fails to provide an SBC.
W-2 Disclosures For Larger Employers: Employers that file more than 250 W-2s were required to disclose the value of health care benefits on each employee’s 2012 W-2 form, issued in January 2013. The Form was required to report the “aggregate cost” of “applicable employer-sponsored coverage,” which includes the amounts paid by the employer and employee.
Contributions To Health Flexible Spending Accounts (“Health FSAs”): For plans beginning on or after January 1, 2013, the Act places a $2,500 limit on amounts an employee may defer by salary reduction to a Health FSA maintained under a cafeteria plan. The limitation is indexed to the Consumer Price Index for tax years beginning on or after January 1, 2014. Employers must ensure that open enrollment materials accurately reflect the new limit.
Medicare Tax Withholding: For tax years beginning with 2013, employers must withhold additional Medicare taxes from the wages of high-earning employees. The Medicare tax rate will increase by 0.9% (from 1.45 % to 2.35 %) on wages over $200,000 for single filers, over $250,000 for joint filers, and over $125,000 for persons who are married but filing separately. There is no employer match for the tax and no requirement for employers to notify employees of the increase.
Grandfathered Plans: Other current requirements of the Act do not apply to “grandfathered plans,” i.e., group health plans in which individuals were enrolled on March 23, 2010. The Act’s grandfathering provision protects the ability of individuals and businesses to keep their grandfathered coverage, while ensuring the additional protections outlined above. Plan sponsors must provide a specific notice in any plan materials of its status as a grandfathered plan. Plans lose their “grandfathered” status if they significantly cut benefits below those provided on March 23, 2010. New employees and their family members may enroll in grandfathered plans as well.
Requirements For New Plans Only: The Act’s requirements that currently apply to new plans but not grandfathered plans include: (i) free in-network preventive health care and immunizations; (ii) mandatory internal and external appeals processes for adverse benefits determinations; (iii) limits on deductibles that may be imposed by employer-sponsored plans; and (iv) rules prohibiting discrimination as to eligibility or benefits in favor of highly compensated individuals.
C. Required “Exchange Notice” To Be Provided To Employees In 2013
On January 24, 2013, the Departments of Labor, Health and Human Services, and Treasury issued Frequently Asked Questions (“FAQs”) concerning the Act. The FAQs postponed a requirement for employers to provide written notice to their employees of the existence of the state and federal health insurance exchanges. The Act required employers to provide, by March 1, 2013, an “exchange notice” to current employees, notifying them of the existence of a state or federal health insurance exchange. (The Act provides federal funding for each state to create a health insurance marketplace offering qualified health insurance plans at four different levels. States are not required to create an exchange, and any voids will be filled by the federal government.)
Because some states had not yet finalized their plans with respect to establishing an exchange, the FAQs announced an extension of this notice requirement to the “late summer or fall of 2013.” The employee notice must be tailored to the circumstances in each state and include a description of the services provided by the relevant exchange and contact information for the exchange. Employers must also provide the notice to new employees at the time of hiring. The FAQs stated that the Department of Labor likely will provide a model notice and additional guidance before the requirement takes effect.
D. Deadlines In 2014 That Require Employers’ Attention Now
Employers should also begin to prepare now for a number of requirements that will become effective in 2014.
“Play or Pay” Employer Requirement: Beginning January 1, 2014, employers with 50 or more full-time equivalent employees must “play or pay” – meaning that employers must either:
- “Play” – i.e., offer at least 95% of its full-time employees (i) an “affordable” health plan (a plan for which the premium for single coverage does not exceed 9.5% of employees’ W-2 income) that (ii) provides “minimum value” (employer covers at least 60% of the costs of benefits). Federal regulators have preliminarily approved three approaches for determining whether health coverage provides “minimum value,” including the use of a “minimum value calculator” (to be provided by a federal agency), compliance with safe harbors, or certification by an actuary; or
- “Pay” – i.e., if (i) an employer fails to “play” and (ii) any full-time employee purchases insurance through an exchange and receives a subsidy, then the employer will “pay” a penalty. The penalty amount depends on which requirement is violated, i.e., whether the employer fails to offer any health insurance, or offers a plan that is not “affordable” or does not provide “minimum value.” The penalty in 2014 for failing to offer any coverage equals the number of full-time employees minus 30 multiplied by $2,000. The penalty in 2014 for failing to offer coverage that is “affordable” and provides “minimum value” is $3,000 per year (assessed on a monthly basis) for only those full-time employees who actually receive subsidized health coverage through an exchange.
For certain employees, including new variable hour and seasonal employees and certain ongoing employees, an employer may not be able to easily determine whether the employee will work (or already works) an average of at least 30 hours per week. To address this issue, the IRS and Departments of the Treasury, Labor and Health and Human Services have established a “safe harbor” that relieves employers of the need to monitor the hours of each employee on a monthly basis. In short, an employer may monitor the hours of such employees over a three-to-twelve month “measurement” period in order to determine whether coverage must be offered to those employees during a subsequent “stability” period. The permissible length of the “stability” period depends on the type of employee (i.e., ongoing employees versus new variable hour or seasonal employees) and whether the employee is determined to be a full-time employee during the measurement period. The proposed regulations establish a special transitional rule pertaining to the length of stability periods beginning in 2014.
Because employers may need time between the end of the measurement period and the beginning of the ensuing stability period to determine which employees are eligible for coverage, and to notify and enroll employees, the proposed regulations allow an employer the option of having an administrative period between the end of the measurement period and the start of the stability period. The administrative period may last up to 90 days.
Employers are not required to use this measurement period safe harbor. If they do, however, they may not modify the measurement period or stability period once the measurement period has begun. In addition, the length of the periods must be uniform for all employees. An employer may, however, apply different measurement periods, stability periods, and administrative periods for the following categories of employees: (1) each group of collectively bargained employees covered by a separate collective bargaining agreement, (2) collectively bargained and non-collectively bargained employees, (3) salaried employees and hourly employees, and (4) employees whose primary places of employment are in different states.
The proposed regulations provide that for fiscal year plans, employers are required to comply with the “play or pay” requirement by the first day of the 2014 plan year (as opposed to having to comply by January 1, 2014). This transitional relief applies to employers who maintained a fiscal year plan as of December 27, 2012, and applies with respect to employees (whenever hired) who would be eligible for coverage under the eligibility terms of the plan as in effect on December 27, 2012.
The proposed regulations further clarify that, in calculating hours of service to determine whether an employee is full-time, an employer must include all hours worked as well as all hours for which an employee is entitled to payment (including vacation, holiday, and sick time). All periods of paid leave must be included.
The proposed regulations address the treatment of new variable hour or seasonal employees who have a change in employment status during the initial measurement period (for example, in the case of a new variable hour employee who is promoted during the initial measurement period to a position entailing more than 30 hours of service per week), establishing when they must be treated as full-time employees for purposes of the “play or pay” requirement. The proposed regulations further establish rules to determine when employees who have had a break in service during a measurement period may be treated as terminated and rehired (i.e., as new employees), and when they must be treated as having merely resumed service.
In order to avoid paying penalties, employers must begin to prepare for the “play or pay” requirement now, by (i) analyzing which employees are eligible for coverage, (ii) tracking employees’ hours to determine which employees work 30 or more hours per week, (iii) monitoring the W-2 income of employees to make sure the premiums for the most affordable single option equal less than 9.5% of their W-2 income, and (iv) confirming that the employers’ plans provide “minimum value.” After this analysis, some employers may decide to pay a penalty rather than offer fully compliant health insurance coverage.
Limitations On Waiting Periods: For plan years beginning on or after January 1, 2014, employers with at least 50 full-time employees may not impose waiting periods of greater than 90 days for participation in employer-sponsored plans, and will face a penalty if they do so. For variable hour and seasonal employees, employers must review and comply with the guidance concerning “measurement” periods in order to ensure compliance with the 90-day limitation.
Automatic Enrollment: After the government issues applicable regulations, which are expected in 2014, employers with more than 200 employees will be required to automatically enroll new employees in a health care plan and provide notice of the employees’ right to opt out.
Limitations On Health Reimbursement Arrangements (“HRAs”): The FAQs address the use of employer-provided HRAs to fund employee purchases of individual coverage on the government-run health care exchanges. The FAQs distinguish between HRAs that are “integrated” with other coverage as part of a group health plan and HRAs that are not integrated. When an HRA is integrated and the other coverage complies with the Act’s prohibition (effective January 1, 2014) on lifetime or annual limits on the dollar value of “essential health benefits” (which will be defined in each state), the fact that benefits under the HRA may be limited does not violate the Act. However, an HRA that is not integrated with group health plan coverage is subject to the Act’s prohibition on annual dollar limits. The FAQs establish that an employer-sponsored HRA cannot be integrated with individual coverage, such as coverage obtained through an exchange.
E. Tax Credits For Smaller Employers
Employers, including non-profits, with fewer than 50 employees are not required to provide health insurance coverage to their employees. Tax credits for doing so have been in effect since 2010 for employers who (i) have fewer than 25 full-time employees, (ii) have average annual wages of less than $50,000 per full-time employee, and (iii) pay at least 50% of the premium cost for each employee. The maximum tax credit is 35% for eligible small employers and 25% for eligible tax-exempt organizations. In 2014, the maximum credit will increase to 50% and 35%, respectively. The credit is refundable for tax-exempt organizations. Smaller employers should contact their tax adviser to determine the tax implications of providing coverage.
F. Recommendations For Employers
Some of the Act’s requirements will be quick for employers to address, while others will require substantial time and effort on the part of employers. We recommend beginning with the following steps:
- Designate a health care compliance champion in the organization;
- Determine whether your organization is a covered employer;
- Determine which requirements currently apply to your organization, and ensure you have met them (e.g., providing an SBC to employees);
- Develop a plan for compliance with the upcoming mandatory notice of health insurance exchanges;
- Review your plan(s) and prepare for the “play or pay” requirement, including tracking and reviewing relevant data, such as employees’ hours;
- Review the status of any grandfathered plans, i.e., whether any changes have caused a plan to lose grandfathered status;
- Verify that at least one single coverage plan is “affordable” and offers “minimum value”;
- If the organization does not have at least one plan that complies with the “play or pay” requirement, then estimate potential penalties, tax impact and other factors (e.g., employee morale) to determine whether to increase coverage to satisfy the requirements, to pay a penalty, or to pursue other options, such as reducing the number of full-time employees and increasing the number of part-time employees; and
- Continuously monitor ongoing government guidance for changes, updates and developments in the law (e.g., new regulations are coming out frequently) to ensure your organization remains in compliance and meets applicable deadlines.
Please feel free to contact us if you have questions about the Act and related regulations and guidance, or any other labor or employment law issue.
An earlier version of this article appeared in the December 2012 edition of New England In-House (NEIH). The Firm is grateful to NEIH for its support in publishing this article.